Inquiry into banks ‘colluding’ to put climate ahead of farmers

New Zealand’s banks face widening scrutiny into the extent to which they’re stifling competition.
And that scrutiny is looking in a direction very different to that which was contemplated by the Reserve Bank’s chief economist last year when, here at Newsroom, he first proposed a market study into competition in retail banking.
Speaking now with Paul Conway, he hopes the Commerce Commission’s market study report into competition in personal banking, to be published on Tuesday, will address constraints on open banking and technological innovation. And of course, the gap between the interest rates that banks will charge borrowers, and what they will pay on deposits – a gap that remains wide, 18 months after the Reserve Bank first expressed concern.
But ahead of that, Parliament’s finance and expenditure select committee has just announced the terms of reference of its own inquiry – and they’re much broader. Its chair says they’re following Conway’s logic.
The committee is looking at commercial and rural banking as well, picking up on Federated Farmers concerns about the big banks all joining the “powerful and influential” Net-Zero Banking Alliance, and “colluding” to effectively regulate the actions of NZ farmers, by constraining lending to high-emissions activities.
The Net-Zero Banking Alliance was formed at COP26 in Glasgow. It is an industry-led, United Nations-convened group. Its members aim to transition their lending and investment portfolios to net-zero emissions by 2050.
BNZ is a member, as are the parent banks of ANZ, ASB, Westpac and Rabobank. In New Zealand, the banks are aiming to reduce dairy, sheep and beef emissions intensity, as the rural sector is NZ’s biggest greenhouse gas emitter.
Federated Farms has been fighting back on multiple fronts – fighting against central and local government climate regulation, fighting Reserve Bank guidance on climate risk, and fighting against banks constraining lending on sustainability grounds. It worries about a global banking conspiracy of sorts: “It may be observed that the policies of the Glasgow Financial Alliance will have more power and influence than some national Governments.”
Now it’s getting cut-through in the government-led parliamentary committee. Stuart Smith, the National MP chairing the inquiry, tells Newsroom the committee is concerned about whether environmental policies are impacting on access to capital.
“And I think that’s important, because we’ve got four large banks – if they’ve all got the same policies, like the Net-Zero Banking Alliance for example, that could restrict and have effects on things.”
The Commerce Commission’s market study seeks to remove barriers to competition in personal banking, which it acknowledges overlaps with rural banking. (“Where these services are intertwined, recommendations we make with respect to personal banking services might also benefit business banking and rural business banking consumers.”)
Its draft report in March highlighted challenges like banks shutting down branches and ATMs in provincial New Zealand.
On Tuesday this week, its final report will advise on how solutions like open banking can enable the adoption of new technologies, thereby helping customers who are remote or excluded.
Conway hopes the commission’s report will advise on removing barriers to open banking and improving the uptake of new technologies. It’s been “a long time” since New Zealand led global banking innovation by introducing Eftpos, in 1985. “Are the competitive conditions a little too cosy across the banks? I think our banking sector is ripe for innovation. I think it’s ripe for increased competition.”
Smith says ultimately, they could apply “that same logic that he’s using there” to farmers’ access to capital. “If you’re going to undertake an activity that might increase emissions on that land, is that going to affect your ability to access capital? I would have thought that’s in the realm of policy for governments to do, not for banks to impose their view.”
Richard McIntyre, the Federated Farmers board member responsible for commerce and competition policy, acknowledges in a submission that some may view the Net-Zero Banking Alliance as a positive development, as greenhouse gas emissions reductions are a global priority. “However, it is important to be cognisant of the potential negative sides of such an approach to greenhouse gas mitigation.”
The submission says Westpac has set a target of a 10 percent reduction in dairy emissions intensity by 2030, and a 9 percent reduction in sheep and beef emissions intensity. BNZ has set an 11 percent reduction target. Other banks are expected to follow, it says, and indeed are required to by their Net-Zero Banking Alliance commitments.
“The key difference with the Net-Zero Banking Alliance is that banks have collaborated and agreed a strategy together. This makes the commitment pre-competitive,” McIntyre’s submission says.
“When such an approach is applied in any other area of competition between banks it is called collusion and is expressly disallowed. The banks involved are all also foreign owned and effectively cooperating to take actions to effectively regulate the actions of New Zealand farmers.”
Smith agrees that’s worth investigating. “We’re also looking at whether environmental policies are going having any impact on access to capital,” he says.
“For example, if someone wanted to build a gas peaker plant in New Zealand, would emissions policies of the banks actually restrict lending to their activity? In which case we could end up burning more coal.
“Let’s say we’re bringing in some land that’s got an activity with little emissions, and we’re going to turn it into a dairy farm, for example, which might have higher emissions. So, do we think that should happen or not?
His view is that’s a decision for elected governments, not for banks. “The issue is that we’ve got four large banks, and if they’ve all got the same policies, then that has a massive impact, rather than an individual bank having a policy that they impose and choosing who to lend money to.
“If they’re giving cheaper or more favourable terms to a certain activity, that’s one thing. But shutting off access to capital altogether is a completely another matter, and that’s more what we’re concerned about.
“I’m not coming to this with a conclusion. What we want to do is ask the questions and find out if they’re having an impact or not. If we find that they are having an impact, we might decide that that’s okay. Or we might decide that it is having a deleterious effect on on our economy, and we want to see something done about that.”
The finance and expenditure select committee and the primary production select committee had both been looking into conducting an inquiry into banking competition, as the National and NZ First parties had promised in their coalition agreement.
The New Zealand Banking Association has also provided a briefing to the primary production select committee, that has informed the terms of the finance select committee inquiry.
Antony Buick-Constable, the association’s deputy chief executive and general counsel, says agribusiness lending is inherently riskier than home lending, based on the ability to repaythe loan if something goes wrong – and that’s why interest rates are higher for farmers.
The past two-and-a-half years’ rise in interest rates has made the gap between residential and farming business lending more noticeable, he says. “This has led to understandable questions coming from rural communities.”
He points out that Reserve Bank regulations assign greater risk to business loans, including agribusiness, than home loans. “The size of the agriculture sector in New Zealandcompared to other economies make this assessment particularly important for NewZealand’s financial stability.”
He adds: “Banks understand the changes and complexity that confront farmers in the 21st century, including increased global competition, complex trade environments and the impacts of climate change and environmental standards.
“As interest rates continue to bite, it is understandable to look to the banking sector. However,the New Zealand rural lending market has functioned throughout our country’s history, and iscompetitive, stable, and adaptable.
“Banks will continue to support the industry through cyclical ups and downs and help it adaptto new and complex challenges.”
In the Reserve Bank’s May monetary policy statement, Paul Conway and his colleagues on the monetary policy committee say New Zealand’s key export industries include agricultural goods like dairy and meat that will face strong headwinds from climate change and tighter environmental regulations. “The disruption caused by the physical effects of climate change on these industries is also expected to weigh on production over the medium term, although adaptation and innovation may mitigate some of these risks over the longer term.”
Ahead of the Commerce Commission’s final report, Conway tells Newsroom that more productive sectors like agriculture, trading on the global market, are helping lower inflation – as opposed to lagging service sectors like food, accommodation and bricks-and-mortar retail.
“We are comfortable with the extent to which mortgage rates and term deposit rates are moving in response to the to this statement and to previous market moves. I think it’s important to note that the market picked this one reasonably well.”
The Reserve Bank will soon be publishing analysis of the extent to which changes in the official cash rate feed through to mortgage rates and term deposit rates. “And there can be a bit of a lag there. You know, it has its own dynamics, consistent with the individual decisions of banks and competition in the market, but overall we’re comfortable.”